New rules to rein in wealth management product sector

Chinese regulators have decided to add a new weapon in their long-lasting tug of war with Chinese lenders, after the growth of lenders' off-balance-sheet businesses went off the chart this year.

The Chinese Banking Regulatory Commission said that it is drafting a new set of rules to govern lenders' wealth management products. The rules will require full disclosure of lenders' wealth management products, including their design and the risks associated with where the funds are raised and channeled, hoping that the banks will get a sense of prudence in profit-taking.

The commission decided to pull harder after the value of such wealth management products jumped by 8 percent to 8.2 trillion yuan ($1.33 trillion) in just three month ending March 31, from 7.6 trillion at the end of 2012. The products are typically higher-yielding alternatives to bank deposits and are invested in a variety of tools, including equities, bonds and trusts.

Chinese banks like selling the products because they help retain clients who might otherwise divert savings to other investments. Depositors like them because they have limited options for their savings, and the products often promise a set rate of return.

Before the latest move, CBRC had already stepped up its watch over wealth management products after a high-profile default of a product sold by Huaxia Bank late last year, causing dozens of invertors to protest at a Huaxia branch in Shanghai.

The incident was followed by a 12-point document issued by CBRC on March 25 aimed at controlling risks involved with the products. One rule, for example, limits investment of client funds in non-publicly traded debts, which are typically riskier than publicly traded ones.

While many analysts believe that the rules will keep wealth management products under watch, they seem to indicate otherwise.

In fact, the CBRC has talked and worked for years about regulating wealth management products, but the intensive issuing of new rules seem to show that it is struggling with the goal.

"It's like a tug of war that never ends. Sometimes one side comes out ahead, but the other side always comes back stronger," said Wang Jianhui, chief economist with Southwest Securities Co Ltd.

"This time, though, regulators seem about to get an edge."

Similar stories of CBRC's regulatory endeavors over wealth management products are universal in the world financial industry today, especially over the past two decades, as financial innovation was increased.

The financial crisis seems to have further intensified the game, as traumatized regulators try to grip harder and banks work harder for ways to get out of that grip.

In fact, many of the financial "innovations" in recent years are countermeasures to new regulatory rules.

In the United States, which has the world's most innovative financial industry, regulators never stop trying.

On May 1, a new set of rules kicked in that require banks dealing in a type of derivatives known as swaps to have extensive records about their customers in order to shield themselves from liability.

Banks are supposed to do their homework and come up with paperwork, but some have gotten around the rule by trading with non-US counterparties or using overseas locations, according to the Wall Street Journal.

What makes regulators work even harder is the fact that their goal is not only to control risks, but also foster development.